Central Banks Spark Bullish Conditions

As outlined in a popular October 2011 video on
the European debt crisis, we are well aware of the serious nature of the problems
facing the financial markets. However, our market
models have been telling us, and continue to tell us, to be open to ongoing
bullish surprises. Debt market and economic fundamentals are being offset,
at least for now, by the expectation of further central bank intervention.
From a technical perspective, the markets are in a bullish posture. The posture
is fragile and subject to change, but for now, it is what it is - bullish.

With little in the way of consensus relative to what actions may be taken
by the European Central Bank (ECB) and Fed this week, it is a good time to
take a step back and look at the health of the markets. Along the way we will
sprinkle in some recent media coverage regarding this Thursday's all-important
ECB meeting.

Moving averages are used by traders to filter out day-to-day volatility, allowing
for easier identification of a market's trend. The chart of the S&P 500
below shows various moving averages from short-term (20-day in blue) to long-term
(200-day in pink). Under bullish conditions, markets tend to remain above their
moving averages and the slopes of the moving averages tend to be positive.
Using those simple parameters, it is hard to argue the S&P 500 currently
has anything but a bullish bias.

While it may not look like it in the small chart above, all the moving averages,
including the green 100-day, had positive or bullish slopes as of the close
on Friday, July 27. As shown in the table below, the same bullish look is present
on the chart of the Dow Jones Industrial Average (DIA).

Across the pond, Bloomberg reported
one possible plan of action for the ECB:

European Central Bank President Mario Draghi has gone on the offensive
as he seeks a game changer in the battle against the sovereign debt crisis...
Draghi's proposal involves Europe's rescue fund buying government bonds
on the primary market, buttressed by ECB purchases on the secondary market
to ensure transmission of its record-low interest rates, two central bank
officials said July 27 on condition of anonymity. Further ECB rate cuts
and long- term loans to banks are also up for discussion, one of the officials
said.

It seems unlikely the ECB will take no new action at Thursday's meeting after
Mario Draghi's "do whatever it takes" comments last week. From the Washington
Post:

Draghi "put his personal credibility on the line" and "would not have
done so without being confident about his key constituency," Erik Nielsen,
global chief economist at UniCredit Bank AG in London, wrote in a note
to clients yesterday. "The ECB under Draghi does not like to mess around
in the market, but if it sees a need, it will come with overwhelming force."

Last week, the Dow and S&P 500 closed above the moving averages below,
giving the bulls an edge. Until some red returns to the tables shown here,
we will continue to give the bulls the benefit of the doubt.

Readings on weekly and monthly charts are more meaningful to investors than
those found on daily charts. The table below shows two important moving averages
with postures that are indicative of bullish trends.

Other European leaders have also hinted at the possibility of imminent action
from the ECB. According to Bloomberg:

"We have reached a decisive point," Jean-Claude Juncker, who heads the
group of euro-area finance ministers, told Germany's Sueddeutsche Zeitung
in an interview. "The world is talking about whether there will still be
a euro zone in the next few months. We have to make abundantly clear with
all available resources that we're completely determined to guarantee the
financial stability of the currency." Juncker confirmed that the temporary
bailout fund, the European Financial Stability Facility, is working with
the ECB on a plan to reduce borrowing costs, adding "we have no time to
lose," the newspaper reported yesterday.

A widely used and effective tool for market analysis is the Relative Strength
Index or RSI. All you need to know about RSI is the bulls tend to be in control
when RSI is above 50. Below 50, RSI identifies a market controlled by the bears.
As shown below, RSI also sides with the bulls on three different time frames.

If the ECB and Fed disappoint the markets this week, the bears could regain
traction in a rapid manner. However, given what we know today, the path of
least resistance is up. If central bankers deliver this week, we will continue
to favor foreign stocks (EFA), commodities (DBC), and oil (USO). Our respect
for the fragile nature of the bull's grip is reflected in a relatively small
hedge (RWM) we are holding. We are willing to maintain the bullish course or
increase that hedge in a headline-driven environment.

Chris Ciovacco is the Chief Investment Officer for Ciovacco
Capital Management, LLC. More on the web at www.ciovaccocapital.com.

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Ciovacco Capital Management, LLC is an independent money
management firm based in Atlanta, Georgia. CCM helps individual investors and
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and globally diversified investment portfolios. Since we are a fee-based firm,
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